Brexit Roils Wall Street, Stocks Extend Global Selloff

A day after flirting with record levels, U.S equity markets on Friday extended a global-market meltdown after the United Kingdom, in a stunning decision, voted to sever its more than 40-year membership in the European Union.

As of 12:15 p.m. ET, the Dow Jones Industrial Average plunged 503 points, or 2.80% to 17506. The S&P 500 dropped 61 points, or 2.91% to 2051, while the Nasdaq Composite shed 167 points, or 3.41% to 4742.

“We had a big relief rally in expectation of a ‘stay’ vote, so hold on to your hats because markets now have to reprice for the outcome. Today will be an ugly day in global financial markets,” Greg McBride, Bankrate chief financial analyst said.

Investors from all corners of the globe struggled to identify what the referendum’s results would mean for the slow-growing world economy as they parsed statements from prominent officials including U.K. Prime Minister David Cameron, who said he would step down from his post in the aftermath of the vote, and as central bankers pledged to do what they could to help keep liquidity from drying up.

Stocks around the world suffered steep losses in overnight trading. The pan-European Euro STOXX 600 dropped 7.03%. Meanwhile the U.K.’s FTSE 100 shed 3.15% –a less sharp decline compared to French and German indexes, which dropped 8.04% and 6.82% respectively as market participants feared the U.K.’s decision could open the floodgates for other EU nations to break their memberships. Markets in Asia leveled out before the close of trade, though Japan’s Nikkei ended down 7.92%.

Meanwhile, currency traders hammered the British pound, which plunged more than 10% overnight to a 1985 low as referendum returns hit the tape. By Friday afternoon, sterling was down 8.80% to $1.35 against the U.S. dollar. The move was a spectacular reversal from the rally seen just before the close of trade in the U.S. Thursday in which the British currency crossed $1.50, its highest level since December.

Global financial stocks were among those slammed in the widespread selloff amid unprecedented uncertainty about the effects of Britain’s exit from the EU. Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Morgan Stanley (MS), and Goldman Sachs (GS) all skidded more than 4%. The financial sector led Wall Street lower on the session as it dropped 4%.

Commodities also saw substantial losses as traders worried how the so-called Brexit would impact the global economy. West Texas Intermediate crude prices fell 4% to around $47, while Brent, the international benchmark also slid 4% to $48.

As traders fled high-risk assets, they sought cover in traditionally safe-havens including U.S. government debt and gold. The precious metal rallied 4.71% in recent trade, jumping to $1,322 a troy ounce. Elsewhere, as the price climbed on the 10-year U.S. Treasury bond, the yield dropped 0.181 percentage points to 1.558%. The Yen also saw a big boost on Friday thanks to its safe-haven status. Against the dollar, the Japanese currency rose 3.72% in recent action.

While risk-off sentiment clearly dominated markets across the world, Deutsche Bank Chief International Economist Torsten Slok,said in a note Friday, the impact on the U.S. economy depends on how much financial conditions tighten.

“The shock we have seen so far in markets is not enough to push the U.S. economy into a recession. That said, if growth abroad weakens and financial conditions tighten further, then …the negative impact on the U.S. economy would be growing over time,” he said.

Chris Gaffney, EverBank World Markets president explained that the U.K.’s decision has essentially frozen the Federal Reserve on tentatively planned interest rate increase this year. He projects better odds the U.S. central bank will move to slash rates rather than raise them as the global environment becomes more unclear and rates in the U.K. and the ECB could move more negative.

Outside the financial world, Gaffney added the Brexit vote could potentially set off a chain reaction as other unsatisfied European Union members look for membership exit doors themselves.

“Scotland is looking to possibly break away from the U.K. and other peripheral countries in the EU may now look to have their own referendums regarding membership in the EU. Spanish elections this weekend throw another bit of uncertainty into he European markets,” he said.